Issues Raised about Investment Securities

Issues Raised about Investment Securities: You have just started work for Warren Co. as part of the controller's group involved in current financial reporting problems. Jane Henshaw, controller for Warren, is interested in your accounting background because the company has experienced a series of financial reporting surprises over the last few years. Recently, the controller has learned from the company's auditors that there is authoritative literature that may apply to its investment in securities. She assumes that you are familiar with this pronouncement and asks how the following situations should be reported in the financial statements.

Situation 1: Trading securities in the current assets section have a fair value that is $4,200 lower than cost.

Situation 2: A trading security whose fair value is currently less than cost is transferred to the available-for-sale category.

Situation 3: An available-for-sale security whose fair value is currently less than cost is classified as noncurrent but is to be reclassified as current.

Situation 4: A company's portfolio of available-for-sale securities consists of the common stock of one company. At the end of the prior year the fair value of the security was 50% of original cost, and this reduction in market value was reported as an other than temporary impairment. However, at the end of the current year the fair value of the security had appreciated to twice the original cost.

Situation 5: The company has purchased some convertible debentures that it plans to hold for less than a year. The fair value of the convertible debentures is $7,700 below its cost.

Solution Preview

Situation 1: Trading securities in the current assets section have a fair value that is $4,200 lower than cost.

When a company's trading securities in the current assets section have a fair value that is lower than cost, GAAP requires that the securities have to be reported at their fair market value, on the balance sheet. The difference between the cost and the fair market value of the security would be reported as an unrealized loss on the company's income statement.

Situation 2: A trading security whose fair value is currently less than cost is transferred to the available-for-sale category.

When a trading security has a fair value that is currently less than the cost that is transferred to the available for sale ...

Solution Summary

The solution analyses each of five situations involving trading securities to make a conclusion on how to report them in the company's financial statements. 470 words with two sources for further reading included.